Monetary Policy Committee (MPC)

Why in News?

The MPC of the RBI voted unanimously to reduce the policy repo rate by 25 basis points to 5.25%, citing low inflation (2.2%) and strong growth (8%) in the first half of the year.

• MPC – It was constituted in 2016 as a statutory body to formulate monetary policy in India.
• Legal basis – As per Section 45ZB of the RBI Act, 1934.  ​
• Composition - 6-member body –
  • Governor of RBI (Chairperson, ex officio) ​
  • Deputy Governor of RBI in charge of Monetary Policy (Member, ex officio) ​
  • 1 officer of RBI nominated by the Central Board of Directors (Member, ex officio) ​
  • 3 members appointed by the Central Government
• The MPC is assisted by RBI’s Monetary Policy Department (MPD) for formulating the monetary policy.
• Tenure – The appointed members serve for 4 years or until further orders, whichever is earlier and are not eligible for re-appointment.
• Meetings – The MPC is required to meet at least 4 times in a year.
• Quorum – 4 members.
• Decision – The decision of the committee would be binding on the RBI.
  • It takes decision based on majority vote (by those who are present and voting.
  • In case of a tie, the RBI governor will have the second or casting vote.
• Functions – Determine the policy interest rates required to achieve the explicit inflation target set by the government, while also keeping in mind the objective of supporting economic growth

Key Highlights of recent Committee

• Repo Rate Cut – Reduced from 5.50% to 5.25%.
• Inflation – At a 2.2%, well below the RBI’s target band of 4% ±2%.
• Growth – GDP rose to 8.2% (Quarter 2), reflecting robust domestic demand and investment.
• Implications
  • Borrowers – With lower interest rates, loans become cheaper which boost consumption & investment.
  • Savers – Lower deposit rates leads to reduced savings returns, Savers shift to equities, bonds, mutual funds for higher yields.
  • Markets – Cheaper loans expand credit, raise company profits, and lift investor confidence (positive sentiment).
  • Policy Flexibility – Neutral stance keeps options open for RBI to adjust rates either way amid global uncertainties. Future rate decisions will depend on inflation and growth trends.

Various Instruments Used in Monetary Policy

References

1. The Hindu | MPC cuts repo rate by 25 bps
2. Shriram Finance | MPC
3. PIB | MPC